What factors do you look for in an investment?

So I’ve always been a trader on technicals, but recently I’ve decided to do the more longer term investing since I can’t be active on the market everyday from 9.30-4pm.

Currently I’m using 3 metrics to find potential investments to hold for a few months/years. This is the process I use:

1) Look at charts – has it been uptrending over the last 6 months?
2) Look at the Cash/Debt ratio – Looking for ratios 4 or above
3) Look at PE – ideally want it around the 20 mark, but depends on industry when compared to peers

Using this criteria, I found the following potential investments:
> OCLR – 60.8 PE – 31.01

> TTWO – 6.65 PE – 352.93

> GNTX – 1000+ PE – 17.88

> MRVL – no debt PE – 380.73

> MOMO – no debt PE – 48.67

> SLM – no debt PE – 23.15

> YHOO – 34.5 PE – -202.85

Now from here, I’ll be looking more into the companies and see what they’ve been promising/doing over the last year and what they plan for the next year. How have they been with Analysts predictions? After all of these check out, I’ll probably take a position.

I was wondering what criteria you guys use for longer term investments? I’m fairly new to this as I mentioned, so looking to learn!

How is this relevant? How do you know if it’ll keep uptrending? This is a poor criteria.

>2) Look at the Cash/Debt ratio – Looking for ratios 4 or above

What does cash/debt have to do with *anything*? If a firm has $200 cash and $400 debt, the ratio is 0.5. If the firm pays off $100 in debt then the ratio is 0.3 (100/300). This is clearly a completely meaningless metric.

Debt isn’t bad, look at solvency ratios. Cash/debt is completely meaningless. This is a poor criteria.

> 3) Look at PE – ideally want it around the 20 mark, but depends on industry when compared to peers

PE of 20 is a completely meaningless figure. The second part of your sentence is correct, it depends entirely on the industry. And even if a company’s PE ratio is higher/lower than peers, that doesn’t necessarily mean anything good/bad. You can’t make statements like that.

There are no generic criteria for good investments. You have to look at every opportunity on its own merits. In some industries having EBITDA margins of 12% is abysmal, while in others it can be industry-leading. Having a ton of debt isn’t a problem if you’re looking at an extremly cash-flow stable business (even if the company isn’t holding any cash). PE ratios aren’t that helpful, because in order to understand them you have to understand the industry and business anyways, and by the point that you understand that you don’t need to look at PE.

Here’s a universal criteria for a great investment: you know that a company is going to perform way better than literally everybody else thinks it will. That’s it. That’s the only generic claim that you can make about what criteria makes a good investment.

If everybody else thinks the company is going to perform as good as you think, then the performance is priced into the stock. If everyone thinks it’s going to perform better than you *know*, it’s a great short opportunity. If everyone thinks it’s going to perform worse than you *know*, it’s a great buy. But on top of *knowing*, you also have to know the timelines. You could *know* that a company is going to perform better than everyone thinks, but if it takes forever to prove, you’re not going to make money, because you have to invest before everyone sees it, and then everyone has to see it, so the price moves to reflect it. That’s it.

I was trained as a top down deep value fundamental equity analyst. So, I call it flipping rocks. I look for mid to small caps with declining/low trading volume with few sellside analysts. PEG<1.0, meeting earnings but few beats. I devour 10k’s looking for an edge. Strong management is the factor I seek. Often these are takeout targets because they drift away from fair value and a mega cap gobbles them up for cheap, taking you along for the ride. These companies are all about execution – if they can’t execute, then they deserve to be under valued. Find one of them you really dig and build a position.

I look at the median of some ratios in whatever company’s sector and industry. Is it way too close to the top or the bottom? Do any of the ratios look ridiculous? Is the price already a good amount away from the trend line? Ratios I look for so far are dividend payout, P/B, P/E(ttm), ROE, and D/E. I compare historical figures, I search Google and Reddit for sentiment, and I ask an accountant I know to check out their books.

My belief (along with that of other great investors) is that the short term is very noisy (news, hysteria…) but in the long term stocks tend to reflect what their really worth.

My first step: #1 Do you understand the business?
You must be able to understand what it does and how it generates its cash flow.
Furthermore you must be able to think whether its earnings will be their in 10+ years. In other words, imagine you could only trade this stock once every 10 years, would you be happy on its’ cash flow alone?
Also, does the sector the business is in make sense? (aka avoid real estate in 2008)
You should also consider what this business relies on, eg if foreign exchange prices were to change what would happen to it, and how it would affect the cash flows.
MAKE SURE THE CASH FLOWS ARE SECURE AND CAN BE FORECAST 10+ YEARS.

My #2 Step: does it have an enduring competitive advantage?
look at its business model it is operating and think whether it is sustainable. AKA if there is a lemonade stand that can make lemonade for less than its’ competitors because it has a patent on some super secret formula lasting for 10+ years thats a great lemonade stand to own.
The way to find competitive advantages is by reading their annual reports and financial statements and comparing that with the sector whilst also conducting fundamental research (news, “scuttlebutt”, etc….)

My step #4: does it have first-class management?
has management tried to maximize shareholder value? Have they done anything stupid or have they innovated their business? Look at Return on Equity and Return on Incremental Invested Capital as well as return on tangible book value.
Also watch their conference calls and read about their future plans, do they make sense? will they benefit you in the future (directly/indirectly)?

My step #5: Is it a bargain?
First start by doing a liquidation value, this can be done through net-net working capital or many other techniques (I have my own special method). This is really your maximum loss, if the business were to suddenly fall apart and everything were sold under fire sale-ish conditions this is what you would recieve.

Screw the metrics, the value of a business is the sum of its’ cash flows from now until kingdom come discounted back to today nothing more nothing less.
This is the real balance, it must provide a discount of at least 35% from what you value it to what it is trading at.
If you don’t know how to do a DCF model go watch a tutorial. For the discount rate you should probably go with that of the average annual inflation (around 3-4% say + 1% for a riskfree trade (TIPS)) but in your mind you should have a minimum hurdle rate, that is if you could buy something that you know will perform 8+% a year why buy something that will give 7%?

My last step (bonus icing on the cake) Is there a catalyst?
Is there some news somewhere that has depressed the stock that will probably go away and cause the stock to go back up?
Essentialy, is there some information that will cause the stock to reflect its intrinsic value faster than just having patience? Time is the ultimate resource and the faster your investment pays off the better. Having said this, it is really not a necessity for an investment, it just provides you with an additional level of protection against loss of capital (the ultimate “risk”)

Provided you can tick all that you are onto a winner.
Any questions send me a direct message.

Finding investment opportunities
52-week low list
Wall Street Journal / Bloomberg / Some business news paper that is good
If i were to ever use a screener I would look at EV/EBITDA being below industry average although after the screen I wouldnt look at EBITDA again (depreciation has real value trust me).
Pick a sector and get very very very very good at it (you will probably find 1 long and 1 short in most smallish sectors)

Not every stock you look at has to be a winner, you are only scored on what you buy. So choose wisely.